Tracing CO2 in China-US Trade: a GVC Perspective

Tracing CO2 in China-US Trade: A GVC Perspective

Feng Dai

Nanjing Forestry University, Nanjing, Jiangsu, China, 210037

Nanjing University, Nanjing, Jiangsu, China, 210093

Ruixiang Liu, Dantong Chen, Xuguo Wang

Nanjing Audit University, Nanjing, Jiangsu, China, 211815

Abstract: Based on the HEM method and EORA database, this paper traces the global CO2 emissions in 189 countries and 26 sectors generated by China-US trade in the GVC perspective from 1996 to 2015. The results show that, other than China and the US, China's exports to the US mainly generate CO2 emissions in Asian, European and African countries, while US’s exports to

China mainly derive CO2 emissions in Asian, European and North American countries. China is a net importer of CO2 in China-US trade, but the statistics by traditional gross trade overestimate

China’s BEET surplus. The share of CO2 emissions in China’s intermediate exports to the US is on the rise, while the share in US’s intermediate exports to China is on the decline. At the industrial level, China’s exports to the US cause more manufacturing CO2 emissions but its proportion is decreasing in China and other countries while increasing in the US. The CO2 emissions generated by US's exports to China are mainly in services in the US and other countries, while manufacturing in China, which indicates China’s GVC status as the world manufacturer.

CO2 emissions in other countries are mainly in the sectors of electricity, gas and water, petroleum, chemical and non-metallic products, and mining and quarrying, which implies that China and the

US are making use of the resource and raw materials of other countries to produce their exports.

Keywords: CO2 emissions; Global value chain; China-US trade; Hypothetical Extraction Method

Acknowledgement: This work was supported by China National Philosophy and Social

Science Fund Project under Grant No.16BJL089; and China National Natural Science Fund

Project under Grant No.71573137.

1. Introduction

Since 2018, China-US trade frictions have been escalating. One of the important excuses is the growing trade imbalance between the US and China. According to US statistics, the US-China trade deficit in goods reached 376 billion dollars in 2017, accounting for nearly 47% of the total US trade deficit in goods. The US believes that the trade deficit reflects the imbalance in the distribution of interests between China and US in bilateral trade, i.e. the US losses while China gains. Therefore, they increased tariffs to restrict imports from China. At the same time, they required China to cut down tariffs and increase imports from the US to reduce the trade deficit. However, the US evaded that China has paid a huge environmental price while meeting the needs of American consumers with a large number of cheap goods.

The relationship between international trade and the environment has been concerned by researchers from different countries in the past decade. Machado, Schaeffer and Worrell (2001) apply a hybrid I-O model to study the embodied carbon in Brazil's imports and exports and find that one-dollar export embodied 40% more energy and 56% more carbon than one dollar imports.

Christopher et al. (2007) use the multi-regional input-output model (MRIO) to analyze the impact of international trade on the carbon footprint of American households. Peters et al. (2006) use GTAP data and MRIO to calculate the trade implied carbon emissions of 87 countries and regions in 2001.

They find that the trade implied carbon emissions accounted for one fourth of the world's total carbon emissions. Qi et al. (2008) estimate the embodied carbon in China's import and export trade from 1997 to 2006 using the Input-Output method. The results show that China bore a large amount of carbon for other countries during 1997-2006.

As the world's two largest economies, China and the US are also the world's two largest carbon emitters. According to UNCTAD data, China and the US ranked the first and the second in the world

CO2 emissions in 2015, with 9206.713 million tons and 5559.569 million tons of CO2 respectively.

Some of the literature focuses specifically on the environment effect of China-US trade. Shui and

Harriss (2005) measured carbon emissions in China-US trade. They find that the US avoided 3%-6%

CO2 emissions through importing from China, while 7%-14% CO2 emissions in China were due to the production of exports to the US. However, they use US national I-O table to derive CO2 emission factors for the US exports, While CO2 emission factors for Chinese exports were estimated based on the correction for differences in the fuel mix of the manufacturing sector in 2

China and the US. Du et al. (2011) employ a Single Regional I-O model and SDA method to analyze different factors driving the changes in CO2 emissions embodied in China’s exports to the US during 2002–2007. The result shows that China is a net exporter of embodied CO2 emissions in

China–US trade and among all the factors driving the increase of CO2 emissions embodied in

China’s exports to the US, the total volume of exports was the first while the intermediate input structure the second. Guo et al. (2010) use a Bi-Regional I-O model to quantify the effect of

China-US trade on national and global emissions. They find that both China and US reduced CO2 emissions through imports from each other, but imports from China increase global CO2 emissions by 178.62Mt while imports from the US reduce global CO2 emissions by129.93Mt. But they define global impact as the gap of the CO2 emissions caused by the import and export. Dang Yuting (2013) use the input-output tables of China and the US to calculate the embodied pollution and pollution structure of manufacturing import and export between China and the US from 2001 to 2010. The result shows that China is still an environmental deficit country in bilateral trade between China and the US, but the embodied pollution of China has no obvious downward trend. The export structure of the US to China is cleaner than that of China to the US. China's import and export structure needs to be further optimized. Liu et al. (2017) calculate China's CO2 emissions embodied in bilateral trade using a modified, non-competitive import input–output method and find that net CO2 emissions embodied in China's trade in 2007 were much lower than previous estimations. But they only consider the importing and exporting countries with taking other countries into account.

It’s not difficult to find that most of the literature focus on the environment effect of trade on exporting countries. However, with world economic integration, production has been fragmented and become a multi-national activity. The international division system presents a global value chain (GVC) division characterized by intermediate trade. From the perspective of GVC, the CO2 embodied in the final products includes not only the carbon emissions directly generated in the producing country, but also those generated in other countries by imported intermediates used in the production process. Therefore, the carbon emission effect of bilateral trade is not only related to exporting countries, but also to all countries participating in the production chain. Countries at the high end of the global value chain are more likely to transfer carbon emissions to exporting countries and other countries by importing final products, while countries at the low end of the global value chain, especially exporters of final products, often become "pollution havens" of 3 developed countries. To trace the CO2 emissions in Global Value Chains, Meng et. al.(2018) combine the value added accounting framework proposed by Koopman, Wang and Wei (2014) and

Wang et al. (2013,revised in 2018) with CO2 emissions. They construct a new environmental accounting system, tracing CO2 emissions of a country in the global value chain through eight value link routes. Pan An (2018) follows Meng et al. (2018) and calculates the embodied CO2 emissions of China-US trade from the perspective of Global Value Chain using WIOD data under the Gross trade accounting framework. The results show that embodied carbon in China-US trade is mainly from the domestic CO2 emissions of exporting country，and the importing country should take the main responsibility for CO2 emissions from the principle of consumer responsibility．However, the value-added framework of Wang et al. (2013) is overly complex and difficult to operate. Besides,

Meng et al. (2018) and Pan An (2018) didn’t trace the footprint of CO2 emissions caused by

China-US bilateral trade in different countries, neither did they separate intermediate exports from final ones. Therefore, in this paper, we will apply a simple and intuitive value-added decomposition framework to trace the carbon footprint of China-US trade, from national level and industrial level, identifying intermediate exports and final exports, to get a more comprehensive understanding of

China-US trade.

2. Methodology and Data

2.1 Methodology

Hypothesis Extraction Method (HEM) is a simple and intuitive mathematical method first proposed by paelinck et al. (1965) and strassert (1968), which is used to measure the relevance and potential importance of a certain country (sector) in an economic network. The traditional multiplier method is to measure the importance of the research object by the simple average of the technical coefficient, while HEM method measures the "criticality" of the country (Department) by eliminating all the external connections between the research object and the economic network and eliminating its trading relations to all other countries (sectors). The loss caused by the assumption of stopping external economic activities is regarded as a measure of the "criticality" of the research object in the potential network. The core technology is to extract the country (sector) from the input-output table, and to set the value of the corresponding position to 0, then calculate the

4 hypothetical economic indicators, then use the actual economic indicators minus the hypothetical indicators to get the importance of the extracted country (sector). Los et al. (2016) and LOS and

Timmer (2018) employ HEM method to the decomposition of value-added trade and set a new framework, which is easier and more intuitive to operate than Wang et al. (2013, 2018). In this paper, we will follow Los et al. and apply the HEM method to estimate the CO2 emission embodied in trade, to trace the CO2 emission in all participating countries in the global value chain resulted from the bilateral trade between China and the US.

Assume that the world is composed of m countries and regions, each country has n sectors, and the total output can be used either as intermediate input or as final use, either by its own country or by other countries through trade, then the structure of the world input-output table is shown in Table

Table 1 A General Inter-Country Input-Output Table Intermediate input Final use Total Country 1 … Country m Country 1 … Country m Output Country 1 Z11 … Z1m F11 … F1m X1 … … Zrs … … Frs … … Country m Zm1 … Zmm Fm1 … Fmm Xm Value VA1 … VAm Added Total Input (X1)’ …. (Xm)’ Where, Zrs is an n×n matrix, representing the intermediate inputs produced by R country for S country; Frs is an n×1 vector, representing the final products produced by R country for S country;

X is an n×1 vector, representing the total output of each sector in R country; (X)’ is the transpose of

X; VAr denotes a 1×N vector of direct value added in country r. The world direct input coefficient matrix can be defined as AZ𝑋, which is a mn mn matrix, where 𝑋 denotes a diagonal matrix with the global output vector X in its diagonal. The total output X can be divided into intermediate inputs and final products, X = AX + F, or X = BY, where B1A is the classical Leontief inverse matrix.

To illustrate the HEM method more clearly, we simplify the m-country model into a three-country model, with country r, s and t, each country with n sectors. Then the corresponding matrixes of intermediate input, final products and total output can be expressed as follows:

Z Z Z F F F X Z=Z Z Z; F=F F F; X=X Z Z Z F F F X

The world direct input coefficient matrix is expressed as:

A A A AZX =A A A; （1） A A A

W Define W=W as the vector of total CO2 emissions generated by a series of economic W activities such as production and consumption in each country, then the direct CO2 emission coefficient can be expressed as follows:

𝑤 𝑤X W𝑤; （2） 𝑤

Define u as a 3n×1 unit vector, then the global CO2 emissions can be expressed as follows:

W𝑤IA𝐹𝑢 （3）

Now, we can apply the HEM method to calculate the CO2 embodied in bilateral trade between

R and S country. To compute the CO2 emissions generated by exports from R to S, we can first find out the actual CO2 emissions generated by the production activities of each country. Then, we assume that there is no trade between R and S, and the CO2 emissions generated by each country, i.e. the hypothetical CO2 emissions W*, can be obtained by subtracting the hypothetical W* from the actual W.

First, we assume that the intermediates exported by R country to S country are extracted from the input matrix, i.e., Ars in direct input matrix A is set to 0. The extracted direct input matrix is expressed as:

A 0 A ∗ A =A A A （4） A A A

In the case of unchanged global production structure, assume that S country does not import intermediate products from R country, the hypothetical CO2 emissions generated by world production will be1:

1 It should be noted that W* should not be seen as the real CO2 emission level that would result if intermediate exports from R to S would be prohibited, because In a general setting with more flexible production and demand functions, substitution effects will occur. Consequently, the global production structure and final demand levels will change and the global CO2 emissions will not be W*(Los et. al. 2018). 6

W∗ wIA∗𝐹𝑢 （5）

Then the global Co2 emissions generated by the intermediate exports from R to S can be calculated by the difference between the actual CO2 emissions and the CO2 emissions from the hypothetical extraction of intermediate exports, which is as follows:

∗ W WW （6）

Next, assume that the final exports from R to S are also extracted from the final product matrix, i.e., Frs in the final product matrix F is set to 0. The extracted final demand matrix is expressed as:

F 0 F ∗ F F F F （7） F F F

In the case of unchanged global production structure, assume that country S imports neither intermediate inputs nor final products from country R, the hypothetical CO2 emissions generated by world production will be:

W∗∗ wIA∗𝐹∗ （8）

Therefore, the global carbon footprint generated by the total exports, including intermediate exports and final exports, from R to S can be computed by the difference between the actual CO2 emissions and the hypothetical CO2 emissions after the assumption of extracting the final products, which is as follows:

∗∗ W WW （9）

After we get the global carbon footprint of intermediate exports and total exports, we can get the global CO2 emissions contained in the final exports from R to S, which can be expressed as follows:

W W W （10）

Similarly, we can extend the model of three countries to m countries with n sectors and trace the CO2 emissions in all GVC participating countries caused by bilateral trade.

2.2 Data Sources

At present, there are six databases for studying transnational input-output tables: WIOD,

EORA, OECD, ICIO, GTAP database and AIIOT. WIOD is the world input-output database of EU statistics; EORA is the global input-output database of UNCTAD; ICIO is the transnational input-output database released by WTO; GTAP contains national input-output tables coordinated by the Center for Global Trade Analysis in Purdue University. AIIOT contains the International 7

Input-Output database of East Asia by Japan statistics. Considering the time span and availability of data, most researchers consider using WIOD and EORA databases. The latest WIOD contains transnational IO tables from 2000-2014, but without environmental data, while the 2013 version of

WIOD contains the environmental data from 1995 to 2009. So this paper is based on the Global

Input-Output Database (EORA ) of the UNCTAD, the version of Eora 26. This database covers not only a complete global MRIO table, but also an environmental satellite account of 190 countries, in a harmonized 26-sector classification, in 1990-2015. For the analysis of global carbon footprint,

EORA covers almost all countries in the world, which describes the inter-country and the transfer of carbon footprint between sectors more accurately. In addition, the time span we choose is

1996-2015, during which China entered the WTO in 2001, and the global financial crises happened in 2007, therefore we can better detect the CO2 emissions generated before and after China entered the WTO, and before and after the financial crisis.

3. Carbon Footprint of China-US Trade

3.1 CO2 emissions embodied in China-US trade at the national level

Based on equation (9) and the data of 190countries (regions) in EORA from 1996 to 2015, we compute the carbon footprint of exports from China to US and US to China respectively, at the national level and added up the CO2 emissions of 26 industries in each country. The results are shown in Table 2.

Table 2 CO2 emissions embodied in China-US Trade, 1996-2015 (million tons) Exports from China to US Exports from US to China China USA Rest of the world2 USA China Rest of the world (1) (2) (3) (4) (5) (6) 1996 149.11 0.72 4.85 13.66 0.25 1.82 1997 172.99 0.78 6.24 12.80 0.29 1.93 1998 220.00 1.06 9.63 12.83 0.36 2.20 1999 220.50 1.13 10.62 13.40 0.38 2.40 2000 249.07 1.70 14.04 17.65 0.54 3.46 2001 236.42 1.35 14.14 15.17 0.46 2.95 2002 261.83 1.46 15.33 16.50 0.56 3.18 2003 314.19 1.71 18.98 19.15 0.78 3.54 2004 405.08 2.09 23.88 22.15 1.15 4.18 2005 470.57 2.31 27.76 23.39 1.43 4.72

2 The rest of the world here refers to all countries other than China and the US in the Eora 26 dataset, while not the Statistical Discrepancies(marked as ROW) at the end of the dataset. 8

2006 537.03 2.69 33.11 25.80 1.86 5.35 2007 542.75 3.04 36.08 31.69 2.42 6.41 2008 527.02 3.00 35.82 34.44 2.65 7.04 2009 410.81 2.16 26.04 34.48 2.10 6.20 2010 463.75 2.86 34.01 43.90 3.04 8.19 2011 449.76 3.31 37.54 52.55 3.63 10.03 2012 432.98 3.18 35.75 53.17 3.49 9.90 2013 408.39 3.04 34.37 54.23 3.33 9.92 2014 399.57 2.94 33.49 53.52 3.34 9.74 2015 387.62 2.72 29.45 54.35 3.21 8.96 Source: Based on EORA data and the equations above, the author calculates the results.

With the data in table 2, we can get the proportion of CO2 emissions generated by exporting country, importing country and other countries (Figure 1). We find that from 1996 to 2015, on average, there are about 93.6% domestic CO2 emissions embodied in China’s exports to the US,

5.9% in other countries and only 0.5% in the US. For CO2 emissions embodied in US’s exports to

China, 81% in the US, 4.1% in China, and 14.9% in other countries. It is obvious that US transfers

19% CO2 emissions to abroad for the production of its exports, much more than China does. We also find that both China and US are generating less and less proportion of domestic CO2 emissions embodied in their bilateral exports. This may reflect the fact that the international division is getting refined and more countries are participating in the value chain of China-US trade. For the proportion of CO2 emissions generated by China-US trade in countries other than China and US, we find that the CO2 emissions in other countries generated from China's exports to the US are on the rise which imply that China involves deeper in GVC division, while those from US's exports to China are

"inverted U-shaped", which may be resulted from the revival of trade protection in the US after global financial crisis.

CN TO US US TO CN Other Other Countries countri US es China

China US

Figure 1 Average shares of CO2 Emissions in China-US Trade (1996-2015)

For the CO2 emissions of China-US trade in exporting countries, we find that CO2 emissions in China caused by exports to the US appear to be an inverted U-shaped trend, increasing steadily from 1996 to 2001, then significantly from 2001 to 2007, and reaching the zenith of 542.75 million tons in 2007. This may be because China participated in the division of global value chain more deeply after its entry into WTO in 2001. However, due to the limitation of technology, it appeared in the low-end position in the global value chain, mainly undertaking the completion of a large number of final products and the processing of some heavy industrial intermediates. Petrochemical, metals, non-metals and other products needed for heavy industrial intermediate processing are provided by the major carbon emission sectors, resulting in a large amount of CO2 emissions from China's exports to the US in China. There was an overall decline in CO2 emissions after 2008. The main reason may be that on the one hand, the financial crisis in 2008 led to a decrease in the volume of

China-US trade, resulting in a reduction in CO2 emissions from China's exports to the US in China; on the other hand, China speeded up its trade structure upgrading strategy in response to the global crisis, which led to a rapid reduction of its direct CO2 emission coefficient. CO2 emissions in the

US resulting from US exports to China are increasing during the analysis period. There are two periods of rapid increasing: 2001-2006 and 2009-2011. The former increase may be due to the expansion of China-US trade after China's entry to the WTO, and the latter may be due to the fact that after the global financial crisis, the recall of manufacturing industries advocated by the US has led to the return of some originally outsourced production to the United States, and there were more domestic production embodied in its exports to China, which led to an upward trend of carbon emissions. Overall, however, the CO2 emissions in exporting countries generated by US exports to

China are much lower than those generated by China’s exports to the US.

Figure 2 displays the changes of direct CO2 emission coefficients in China and the US. Overall, both China and the US showed a downward trend from 1996 to 20153. China's direct CO2 emission coefficient decreased from 1.56 tons per dollar in 1996 to 0.37 tons per dollar in 2015, and the US's

CO2 emission coefficient decreased from 0.39 tons per dollar in 1996 to 0.19 tons per dollar in 2015.

China's direct CO2 emission coefficient decreased much faster than US’s, but still remains higher

3 This conforms to the findings by Du et. al. (2011). They found that Direct CO2 emission intensities of most sectors in China decreased gradually from 2002 to 2007 due to advances in technology. 10 than that of the US. After 2004, there was a sharp decline of China’s direct carbon emission coefficient which was related to the 3rd Plenary Session of the 16th Central Committee of the

Communist Party o China held in 2003 when the concept of scientific development was put forward.

After that, energy saving and emission reduction was concerned more than before.

China US 1.80 1.60 1.40 1.20 1.00 0.80 0.60 kg per dollar 0.40 0.20 0.00

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Figure2 Direct CO2 Emission Coefficient in China and the US

Source: Based on EORA data and the equations above, the author calculates the results.

From table 2, we can get the balance of embodied emissions of China-US Trade(BEET).

From gross trade perspective, the balance can be obtained by the difference between the CO2 emissions embodied in exports and those embodied in imports, including emissions generated abroad. In table 1, it can be obtained by using columns (1)+(2)+(3) minus columns (4)+(5)+(6),

But in GVC perspective, we define the balance as the difference between CO2 emitted in two trading countries for producing their bilateral trading products, no matter in exports or imports.

Here, in table 1, the balance can be calculated by columns (1)+(5) minus columns (2)+(4). Figure

3 shows that, China is on the BEET surplus (or environment deficit) while the US on the BEET deficit (or environment surplus) in China-US trade. China’s BEET surplus is larger in the gross trade perspective than in GVC perspective, which implies that the statistics by traditional gross trade overestimate the domestic CO2 emissions embodied in exports or imports. Generally, from 1996 to

2015, China-US environment deficit shows a converted-U shape (see Figure 2). From 1996 to

2006, China-US BEET surplus continued to expand, and the environment deficit increased significantly from 2001 to 2007, reaching a maximum of 510.44 million tons in 2007. This is related to China's entry into the WTO, which resulted in the increase of China's exports to the US, and 11 derived more CO2 emissions for export productions. After 2008, due to the global financial crisis,

China-US environment deficit declined, however as there are more CO2 emission embodied in US’s exports to China than embodied in China’s exports to US, the environment deficit still remains at a high level, with 333.76 million tons in 2015. That is to say, China is a net importer of CO2 in

China-US trade. Although the environment deficit tends to decline with the implementation of some laws and regulations about environmental protection in China and the ongoing structural reform on its own supply side, the damage to the environment caused by CO2 emissions from China-US trade is irreversible. Even China remains a trade surplus in trading with US but it is in the status of net environment deficit and has also paid a huge price in environmental governance.

600

500

400

300

million tons 200

100

BEET by GVC BEET by Gross Trade

Figure 3 BEET in China-US Trade

In order to dig deeper in the domestic CO2 emission embodied in China-US trade, we separate the intermediate exports from final exports, and calculate the proportion of CO2 emissions generated by the two types of exports (see Table 3).

Table 3 share of CO2 emissions embodied in China-US intermediate and final exports Domestic CO2 emissions embodied in exports Domestic CO2 emissions embodied in exports year from China to US (%) from US to China (%) Intermediate exports Final exports Intermediate exports Final exports 1996 42.85 57.15 81.42 18.58 1997 44.07 55.93 82.21 17.79 1998 38.79 61.21 83.85 16.15 1999 39.27 60.73 83.90 16.10 2000 38.33 61.67 85.20 14.80 2001 38.61 61.39 82.92 17.08 2002 39.85 60.15 82.92 17.08 2003 42.45 57.55 82.50 17.50 2004 44.15 55.85 82.42 17.58

2005 44.26 55.74 82.65 17.35 2006 44.94 55.06 82.05 17.95 2007 47.06 52.94 81.57 18.43 2008 47.36 52.64 81.19 18.81 2009 46.01 53.99 80.78 19.22 2010 47.12 52.88 80.55 19.45 2011 47.90 52.10 80.28 19.72 2012 47.33 52.67 79.22 20.78 2013 47.03 52.97 78.78 21.22 2014 48.31 51.69 78.44 21.56 2015 48.38 51.62 77.86 22.14 Source: Based on EORA data and the equations above, the author calculates the results.

On whole, the share of CO2 emissions in China’s intermediate exports to the US is on the rise, from 42.85% in 1996 to 48.38% in 2015, while the share of CO2 emissions in US’s intermediate exports to China is on the decline, from 81.42% in 1996 to 77.86% in 2015. China and US are showing an opposite trend in the change of CO2 emissions embodied in bilateral intermediate exports. This difference may be due to the continuous development of China’s economy and the reform of the domestic economic system, which enable it to climb up along the GVC from the assembly of the final goods outsourced to the deep processing of intermediate products. This has led to an increase in the share of CO2 emissions generated by China's intermediate exports to the US and a decrease in the share of CO2 emissions generated by the corresponding final exports. In addition, the US manufacturing reflux policy during Obama’s term of office cause US final exports to China contain more domestic productions, thus increases the proportion of CO2 emissions generated by final exports while reduces the proportion of intermediate exports. Table 2 reveals another fact that the proportion of CO2 emissions in intermediate exports from US to China is much higher than that in intermediate exports from China to US. This reflects the gap between China and the US in the GVC division, i.e., China still bears more final processing of goods and locates in the lower end of the GVC, while the US undertakes more productions of intermediates and locates in the upper end of GVC.

By comparing the CO2 emissions in different countries generated by China-US intermediate and final trade, we find that (Figure 5): (1)Other than China and the US, China's intermediate and final exports to the US mainly generate CO2 emissions in Asian, European and African countries, which account for 92% of CO2 emissions outside China and the US in 2015. From 1996 to 2015, on

13 average, the top five emitters are Russia, South Korea, Japan, India and Malaysia. After 2007, South

Korea and Japan ranked higher and higher. This reflects that with China's "One Belt and One Road" initiative, China has strengthened its ties with the countries along OBOR in its production process.

(2) Other than the US and China, the CO2 emissions from intermediate and final exports from US to

China are mainly in Asian, European and North American countries, which account for 78% of CO2 emissions outside China and the US in 2015. From 1996 to 2015, on average, the top five emitters are Canada, Russia, Japan, Mexico and South Korea. We find that Mexico accounts for an increasing proportion year by year. The main reason is that the US, Canada and Mexico signed the

North American Free Trade Area (NAFTA) agreements. As a result, Canada and Mexico are responsible for processing intermediate and final products in American exports to China, resulting in a larger proportion of CO2 emissions in both countries. Besides, South Korea and Japan are the major carbon emitters from US exports to China, and their emissions have also increased. This reflects that as US’s main trade partners, Japan and Korea are also the major intermediate processing countries for the US.

Oceani South Africa South North a Americ 6% Oceania Americ Africa Americ 4% a 1% a 13% a 2% 8% 2% North Americ Europe a 23% 22% Asia 34% Asia Europe 63% 22% US to CN CN to US Figure 5 Geographic Structure of CO2 Emission of China-US trade in Other Countries

(2015)

3.2 Estimation of CO2 emissions embodied in China-US trade at the Industrial Level

with equation (9), we can compute the CO2 emissions embodied in China-US trade in various industries of different countries in the world. Figure 6 shows the industrial distribution of CO2 emissions generated by China-US trade in 2015. There are more manufacturing CO2 emissions embodied in China’s export to the US than US’s exports to China. In manufacturing, the top emitter

14 is the sector of petroleum, chemical and non-metallic mineral products, while in services, the top emitter is the sector of electricity, gas and water.

resourc CN TO US US TO CN e resource 5% 2% manufac. manufac. 40% 34%

service s services 58% 61%

Figure 6 Global Industrial Structure of CO2 Emission of China-US trade (2015)

In order to see the importance of detail sectors of different countries in the CO2 emission in

China-US trade, we examine the ratio of CO2 emissions in each sector to all sectors. Table 3 and table 4 display the sectoral CO2 emissions generated by China's exports to the US ad US’s exports to China respectively4.

Table 3 Industrial Carbon footprint of China's exports to the US (1996 VS 2015) (%) 1996 2015 Sectors China US other countries China US other countries Resource Industries 2.59 4.67 13.91 1.75 2.49 11.18 Agriculture 0.9 0.44 0.6 0.23 0.4 0.46 Fishing 0.05 0 0.05 0.01 0 0.03 Mining and Quarrying 1.64 4.23 13.26 1.51 2.09 10.69 Manufacturing 57.77 30.35 40.41 40.4 33.7 36.72 Food & Beverages 1.04 0.21 0.41 0.46 0.23 0.37 Textiles and Wearing 10.46 0.23 1.97 4.3 0.21 1.38 Apparel Wood and Paper 2.16 0.88 1.07 1.11 0.73 1.02 Petroleum, Chemical and Non-Metallic 23.53 19.72 23.57 16.64 23.78 21.81 Mineral Products Metal Products 5.59 2.29 6.46 5.97 2.46 6.18 Electrical and 9.84 6.47 6.28 9.07 5.6 5.35 Machinery

4 The 26 EORA sectors are aggregated into three broad sectors: the natural resource sector (sectors 1‐3), the manufacturing sector (sectors 4‐11), and the service sector (sectors 12‐25). The 26th sector, Re‐export & Re‐import, shows no effect on the CO2 emissions, so we put it separately, but it has no influence on our results. 15

Transport Equipment 1.02 0.48 0.45 0.93 0.59 0.4 Other Manufacturing 4.13 0.07 0.2 1.92 0.1 0.21 Services 39.65 64.97 45.67 57.82 63.81 52.11 Recycling 0 0 0.27 0.06 0 0.2 Electricity, Gas and 30.59 30.56 28.37 49.35 28.95 35.91 Water Construction 0.13 0.18 0.2 0.06 0.19 0.2 Maintenance and Repair 0.01 0.01 0.03 0 0 0.03 Wholesale Trade 0.13 0.26 0.25 0.06 0.17 0.21 Retail Trade 0.29 0.02 0.21 0.13 0.01 0.15 Hotels and Restaurants 0.19 0.04 0.06 0.1 0.04 0.08 Transport 7.45 32.75 14.95 7.52 33.4 14 Post and 0.21 0.15 0.1 0.05 0.14 0.12 Telecommunications Financial Intermediation 0.5 0.95 1.02 0.39 0.85 0.96 and Business Activities Public Administration 0 0 0.01 0 0.01 0.02 Education, Health and 0.15 0.05 0.1 0.1 0.05 0.1 Other Services Private Households 0 0 0.02 0 0 0.02 Others 0 0 0.08 0 0 0.11 Re-export & Re-import 0 0 0 0 0 0 TOTAL 100 100 100 100 100 100 Source: Based on EORA data and the equations above, the author calculates the results.

Table 3 shows that the CO2 emissions generated by China's exports to the US are mainly in manufacturing in China, while services in the US and other countries. In China, the top 3 emitting sectors in 1996 are sectors of electricity, gas and water, petroleum, chemical and non-metallic mineral products, as well as Textiles and Wearing Apparel , which account for about 64.58% of CO2 emissions, while in 2015, Electrical and Machinery replaced Textiles and Wearing Apparel as the third emitters. This indicates that the structure of China’s exports to the US are changing from labor intensive sectors to capital intensive sectors. In the US, China’s exports mainly derive CO2 emissions in sectors of transportation, electricity, gas and water, and petroleum, chemical and non-metallic products. Table 4 displays the CO2 emissions embodied in exports from US to China.

It shows that the CO2 emissions generated by US's exports to China are mainly in services in the US and other countries, while manufacturing in China, which is the same finding as China’s exports to the US. Domestically, the top 3 emitters are sectors of transportation, electricity, gas and water, and petroleum, chemical and non-metallic products, which account for 81.82% of CO2 emissions in

1996 and 83.83% in 2015. In China, US’s exports mainly derive CO2 emissions in sectors of electricity, gas and water, petroleum, chemical and non-metallic mineral products, as well as

Electrical and Machinery, which account for about 73.61% of CO2 emissions in 1996 and 79.38% in 2015.

From the data in table 3 and 4, we find that, no matter for China’s exports or US’s exports, CO2 emissions in other countries are mainly in the sectors of electricity, gas and water, petroleum, chemical and non-metallic products, and mining and quarrying. It implies that, China and the US are making use of the resource and raw materials of other countries to produce their exports, such as electricity, gas and water from South Korea, Russia, India, Japan and South Africa; petroleum, chemical and non-metallic products from Russia, Korea, Japan, Indonesia and Saudi Arabia; mining and quarrying in Angola, Oman, Russia, Mongolia and Iran.

Table 4 Industrial Carbon footprint of US exports to China (1996 VS 2015) (%) 1996 2015 Sectors US China other countries US China other countries Resource Industries 5.04 3.02 20.57 2.84 2.07 16.86 Agriculture 1 0.46 0.47 0.87 0.12 0.42 Fishing 0 0.04 0.08 0 0.01 0.06 Mining and Quarrying 4.04 2.51 20.03 1.96 1.94 16.38 manufacturing 30.07 55.08 38.13 33.49 39.44 37.92 Food & Beverages 0.59 0.64 0.44 0.68 0.29 0.42 Textiles and Wearing 0.19 2.42 0.45 0.18 0.97 0.45 Apparel Wood and Paper 0.82 1.47 1 0.67 0.68 0.85 Petroleum, Chemical and Non-Metallic 18.63 25.95 22 21.7 17.58 22.89 Mineral Products Metal Products 2.16 9.46 7.12 2.34 8.63 6.9 Electrical and 6.72 13.4 5.99 6.38 10.09 5.23 Machinery Transport Equipment 0.87 0.99 0.88 1.41 0.85 0.91 Other Manufacturing 0.09 0.75 0.25 0.13 0.35 0.27 Services 64.88 41.89 41.3 63.69 58.5 45.23 Recycling 0 0 0.28 0 0.09 0.25 Electricity, Gas and 31.22 34.26 23.96 29.72 51.71 28.89 Water Construction 0.2 0.12 0.24 0.25 0.06 0.22 Maintenance and Repair 0 0.01 0.04 0 0 0.04 Wholesale Trade 0.23 0.13 0.2 0.14 0.06 0.18 17

Retail Trade 0.02 0.3 0.13 0.01 0.12 0.11 Hotels and Restaurants 0.04 0.2 0.04 0.03 0.09 0.05 Transport 31.97 6.07 15.38 32.41 5.88 14.45 Post and 0.15 0.2 0.09 0.15 0.05 0.11 Telecommunications Financial Intermediation 0.95 0.46 0.79 0.85 0.35 0.75 and Business Activities Public Administration 0 0 0.01 0.01 0 0.02 Education, Health and 0.09 0.14 0.06 0.11 0.09 0.06 Other Services Private Households 0 0 0.01 0 0 0.01 Others 0.01 0 0.07 0.01 0 0.09 Re-export & Re-import 0 0 0 0 0 0 TOTAL 100 100 100 100 100 100 Source: Based on EORA data and the equations above, the author calculates the results.

We find that the China-US trade surplus in Electricity, Gas and Water is less than 1% of total

China-US trade surplus, but China-US BEET surplus (environment deficit) in Electricity, Gas and Water accounts for about 47% of the total China-US BEET surplus in 2015. It indicates that

China’s exports to the US are energy intensive products. We further examine the complete CO2 emission coefficient of both countries (Table 5). Complete CO2 emission coefficient represents the direct and indirect CO2 emissions for the production of one unit of output. From 1996 to 2005, the complete CO2 emission coefficient of all sectors in China is decreasing, which reflects that the input output structure of China is changing toward a cleaner production technique. However, the

CO2 emission coefficients of all resource sectors and manufacturing in China are much higher than that in the US, but the gap is closing. The coefficients of most service sectors in China are larger than in the US, except the sector of financial intermediation and business activities in 1996 and two other more sectors in 2015, i.e., transport, and post and telecommunications. This can be explained by the different industry structures between China and the US. As China mainly participates in the manufacturing production of GVC, the induction and diffusion of its services are smaller than those of the US, which results in the CO2 emission coefficients of some productive sectors are larger in the US than in China. It can also be verified that the sectors of electricity, gas and water, petroleum, chemical and non-metallic mineral products, mining and quarrying are high polluting sectors.

Table 5 Sectoral Complete CO2 emission coefficient of China and US (kg/dollar)

China US Sectors 1996 2015 1996 2015 Agriculture 2.48 0.26 0.25 0.11 Fishing 0.53 0.06 0.03 0.01 Mining and Quarrying 6.66 1.56 2.18 1.15 Food & Beverages 2.13 0.33 0.21 0.09 Textiles and Wearing Apparel 2.95 0.43 0.20 0.09 Wood and Paper 2.43 0.38 0.36 0.15 Petroleum, Chemical and Non-Metallic Mineral 11.38 2.37 1.86 0.85 Products Metal Products 4.51 1.18 0.50 0.24 Electrical and Machinery 5.71 1.45 0.66 0.33 Transport Equipment 2.59 0.61 0.27 0.12 Other Manufacturing 1.48 0.21 0.14 0.06 Recycling 0.16 0.11 0.01 0.00 Electricity, Gas and Water 26.06 7.23 8.67 4.48 Construction 1.17 0.17 0.57 0.28 Maintenance and Repair 0.31 0.04 0.04 0.02 Wholesale Trade 0.98 0.17 0.46 0.12 Retail Trade 1.85 0.35 0.11 0.03 Hotels and Restaurants 1.05 0.20 0.28 0.11 Transport 6.25 1.46 5.53 2.88 Post and Telecommunications 0.91 0.15 0.63 0.26 Financial Intermediation and Business Activities 2.72 0.93 4.05 1.74 Public Administration 0.32 0.03 0.02 0.02 Education, Health and Other Services 0.96 0.27 0.21 0.10 Private Households 0.22 0.06 0.03 0.01 Others 0.32 0.03 0.03 0.01 Re-export & Re-import 0.00 0.00 0.00 0.00 Combining table 3,4 and 5, we find that with respect to CO2 emission embodied in China-US trade from 1996 to 2015, the proportion of manufacturing is decreasing in China and in other countries while increasing in the US; the proportion of services is increasing greatly in China and other countries, but decreasing slightly in the US; the proportion of resource sectors is declining in all countries. The changes indicate that: (1) as the complete CO2 emission coefficient is decreasing in China, the CO2 emissions embodied in manufacturing exports is decreasing; (2) the upgrading of trade structure resulted in China’s exports includes more proportion of services; (3) as the US call back some manufacturing production, some intermediates are produced by US instead of other countries. Observing CO2 emissions in detail sectors caused by China-US trade, we find that in China, the proportion of Textiles and Wearing Apparel, wood and paper, and 19 petroleum, chemical and non-metallic products are declining. It can be explained by China's supply-side reform, technological progress and industrial restructuring, which enable China to shift to the higher end of the global value chain, resulting in a reduction in the processing of textile, wood and petrochemical products in China-US trade. 4. Conclusions

In this paper, we employ a clear and intuitive decomposition method based on “hypothetical extraction” to trace the global CO2 emissions in 189 countries and 26 sectors generated by

China-US trade in the GVC perspective from 1996 to 2015. Cross-border production sharing results in CO2 emissions not only in importing and exporting countries but also in all countries participate in the production of bilateral trading goods. GVC analysis enable us to scrutinize the impact of

China-US trade on global environment from the national and industrial level.

At the national level, (1) The CO2 emissions in exporting countries generated by China's exports to the US are "inverted u-shaped" while those generated by the US's exports to China are increasing in the analysis period. China’s BEET surplus is larger in the gross trade perspective than in GVC perspective, which implies that the statistics by traditional gross trade overestimate China’s

BEET surplus (or environment deficit) with the US. However, China is a net importer of CO2 in

China-US trade, no matter in GVC or gross trade perspective. (2) For the proportion of CO2 emissions generated by China-US trade in countries other than China and US, the CO2 emissions in other countries generated from China's exports to the US are on the rise which imply that China involves deeper in GVC division, while those from US's exports to China are "inverted U-shaped", which may result from the revival of trade protection in the US after global financial crisis. From

1996 to 2015, in the production of bilateral exports, US transfers 19% CO2 emissions to abroad while China transfers 6.4% on average. (3) China and US are showing an opposite trend in the change of CO2 emissions embodied in bilateral intermediate exports. The share of CO2 emissions in China’s intermediate exports to the US is on the rise, while the share in US’s intermediate exports to China is on the decline. The proportion of CO2 emissions in intermediate exports from US to

China is much higher than that in intermediate exports from China to US, which reflects that China still bears more final processing of goods and locates in the lower end of the GVC, while the US undertakes more productions of intermediates and locates in the upper end of GVC. (4) Other than

China and the US, China's exports to the US mainly generate CO2 emissions in Asian, European and African countries, which account for 92% of CO2 emissions outside China and the US in 2015, while US’s exports to China mainly derive CO2 emissions in Asian, European and North American countries, which account for 78% of CO2 emissions outside China and the US in 2015.

At the industrial level, we find that (1) There are more manufacturing CO2 emissions embodied in China’s export to the US, but the proportion of manufacturing is decreasing in China and in other countries while increasing in the US. In manufacturing, the top emitter is the sector of petroleum, chemical and non-metallic mineral products, while in services, the top emitter is the sector of electricity, gas and water. (2) The CO2 emissions generated by US's exports to China are mainly in services in the US and other countries, while manufacturing in China. Domestically, the top 3 emitters are sectors of transportation, electricity, gas and water, and petroleum, chemical and non-metallic products, while in China, US’s exports mainly derive CO2 emissions in sectors of electricity, gas and water, petroleum, chemical and non-metallic mineral products, as well as

Electrical and Machinery. (3) No matter for China’s exports or US’s exports, CO2 emissions in other countries are mainly in the sectors of electricity, gas and water, petroleum, chemical and non-metallic products, and mining and quarrying. It implies that, China and the US are making use of the resource and raw materials of other countries to produce their exports. (4) From 1996 to 2005, the complete CO2 emission coefficient of all sectors in China is decreasing, which reflects that the input output structure of China is changing toward a cleaner production technique. However, the

CO2 emission coefficients of all resource sectors and manufacturing in China are much higher than that in the US, but the gap is closing.

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